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Southwest takes $210m Max hit in Q3, expects another knock in Q4

Low-cost carrier Southwest Airlines lost $210 million in revenue during the third quarter as a result of the Boeing 737 Max grounding, and expects an even greater revenue hit in the fourth quarter due to aircraft and schedule reshuffling for the busy holiday travel season.

Southwest estimates the grounding, which took effect in March, cost it $435 million in operating income through September, the company says in its quarterly investor update on 24 October.

Similarly, American Airlines today estimated the Max grounding will cost it $540 million for all of 2019, meaning the Max crisis will likely cost just two US airlines more than $1 billion before year-end.

Southwest, which operates an all-Boeing fleet, has cancelled Max flights through 8 February, and says it expects delivery of seven new aircraft in the fourth quarter pending Federal Aviation Administration re-certification of the type, and the remaining 34 on order moving into 2020. “We assume an un-grounding date around mid-December,” says chief executive Gary C Kelly.

The Dallas-based airline's executives say it will take several months to get the entire fleet back and running once the FAA green-lights the aircraft’s return to service.

“Boeing owes us 75 aircraft – 41 aircraft that will get delivered, along with the 34 we own, and after certification, we expect to get 5-10 aircraft back into service per week,” says chief operating officer Mike Van de Ven. That means it will take 2-4 months to get all the aircraft back into the schedule. “It’s critical that the schedule and the aircraft availability come together.”

Kelly adds, “I don’t want us to pay for airplanes and have them sit”.

The grounding, which is in its eighth month, has left airlines scrambling to publish new schedules in order to accommodate the lack of capacity. Returning the plane to service will be a complex logistical task.

“We are in the midst of updating plans for next year to take the Max off a January 6th return to service and don’t yet have a plan for February 8th, and to be honest, we will wait a little while to see if this is even realistic,” Kelly adds. “It will be messy and we are not in control.”

Southwest and other airlines have had to repeatedly reshuffle schedules as the grounding continues much longer than initially expected.

“We will want to ramp prudently, but as quickly as we can to utilise our assets and to absorb some of the cost pressure we are experiencing here in the fourth quarter,” chief financial officer Tammy Romo says. She says the airline is expecting the 737 Max’s return-to-service incremental costs “in the tens of millions next year”.

Therefore, the uncertainty about the 737 Max’s future leads the company to hold back on financial guidance for next year. “I can’t imagine it will be double-digit growth,” says Kelly.

Financial performance in the third quarter was in line with expectations, with revenue up 1% at $5.6 billion, despite a 2.9% decline in passenger capacity. Net income rose 7% to $659 million from $615 million in the same quarter a year ago.

"Our third quarter 2019 record financial performance was notable considering an estimated $210 million reduction in operating income due to the continued grounding of the Boeing 737 Max aircraft,” says Kelly. “Notwithstanding this challenge, we generated record third quarter operating and unit revenues, solid margins, strong cash flows and returns to shareholders, and a healthy profitsharing accrual for our employees.”

MAX COMPENSATION

Kelly says the company is engaged in discussions with Boeing regarding compensation for damages related to the Max groundings. “The operating income reduction from the Max groundings is estimated to be $435 million for the nine months ended September 30, 2019, and we expect the damages to continue to grow into 2020."

“We have not reached a settlement with Boeing, and no estimated settlement amounts have been included in our third quarter 2019 results,” he adds. "It's a major objective of mine and I want that wrapped up quickly."

Earlier this month, the Southwest Airlines Pilots Association (SWAPA) announced it filed a lawsuit against Boeing seeking damages for the 10,000 pilots represented by the association who have lost compensation since the Max's grounding. The lawsuit alleges Boeing deliberately misled the airline and its pilots that 737 Max aircraft were airworthy and not significantly different from previous-generation 737NGs.

Q4 SCHEDULE RESHUFFLE

As a result of the grounding, Southwest had to repeatedly reshuffle its schedule, which will hit the airline especially hard in the fourth quarter, which is traditionally a strong season for the low-cost carrier due to end-of-year holiday travel. The fourth quarter’s schedule usually has the most complexity, the airline says.

“We will be doing less flying than what’s optimal during peak hours and more flying in non-peak hours,” says president Tom Nealon. “Still we are trying to minimise the disruption during the holiday season, and minimise the impact on our crews and operations.”

It will take about 30-40 days from the issuance of the FAA's Airworthiness Directive (AD) that brings the aircraft back into service for the airline to get manuals updated and pilots trained to bring the aircraft into the schedule, Van de Ven says.

COMMITTED TO HAWAII

Southwest, which began flying to Hawaii in March, is optimistic about its flights to and from the 50th state. At the moment the airline operates 12 daily flights between California and Hawaii, as well as 34 inter-island flights.

“The demand for our service to Hawaii is very strong,” Nealon says, adding that the load factor for these flights are higher than the average. He adds that Southwest will begin flights to Hawaii from San Diego “in the near future” and add additional Hawaii flights in 2020.

“We are absolutely committed to Hawaii even if it will still be a modest portion of our network,” Kelly adds.

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